Banks to shift to risk based deposit insurance plan

Banks to shift to risk based deposit insurance plan
KDIC CEO Mohamud Ahmed (C) during a stakeholder meeting

Commercial banks insurance premiums on customer deposits could soon rise with plans to move to a new risk based model.

Currently banks pay a flat rate of 0.15 percent of total deposits, which regulators now say is insufficient to protect depositors should a bank go under.

According to the Kenya Deposit Insurance Corporation (KDIC), the new model will make banks more risk averse in their decision making and the sustainability of their business models.

KDIC chief executive officer Mohamud Ahmed said on Wednesday that the new model would discourage banks against engaging in irregular practices which has seen a number of lenders go into receivership.

“This will also make our banks be more prudent in the way they invest the depositors’ funds making them stronger and more stable. One of the failures of the banks is the many risks they are exposed to,” Mr Ahmed said during a stakeholder meeting.

Since 2015, three banks have been put under receivership denting customer confidence in the sector.

Central Bank of Kenya data shows that an estimated Sh252 billion remains outside formal banking channels over fears of losing money in case of a bank collapse.

Mr Ahmed said other than making banks more responsible, the new model would also seek to restore confidence.

“I want to ask all our people to bring all the money from ‘mattress’ banking to the banking system as it is strong, sound and stable and in the unlikely event of bank closures, we will resolve such situation in the shortest time possible,” he said.

Kenya Bankers Association (KBA) Chief Executive Officer Habil Olaka said the measure is a motivator rather than a detractor for the banking sector.

“The risk approach to premium charges for banks is a direct motivator in that, the better the risks management practices the lower the premium rate charged on banks by the KDIC. Banks are always trying to reduce their cost of operations,” Mr Olaka said.

Through the risk based insurance model, KDIC is also working on raising the limit on amount payable to depositors should a bank collapse.

Currently customers are guaranteed of receiving up to Sh100,000 of their deposits.

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Story By Kepha Muiruri
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